In 2015, the Rhode Island Division of Taxation issued Declaratory Ruling 2015-01. The question at issue was whether a non-Rhode Island resident decedent’s interest in a multi-member LLC that owned real property was sufficient to subject the decedent’s estate to the Rhode Island Estate Tax. Generally, property has a tax situs in Rhode Island if it is either real estate or tangible property with an actual situs in Rhode Island, or the property consists of intangible personal property and the decedent was a resident. Rhode Island General Law s. 7-16-34 states that a membership interest in a limited liability company is personal property, but since the member’s interest is in the LLC’s property at large, an interest in a multi-member LLC is intangible personal property. As such, the Division of Taxation held in Ruling 2015-01 that the non-resident decedent’s less than 100% interest in the LLC is not subject to the Rhode Island estate tax and, consequently, would not require an estate tax lien discharge.
By contrast, a single member LLC is disregarded, so is considered the same as the individual owner, unless the LLC is taxed as a corporation for federal tax purposes. If no election is made to be taxed as a corporation, the LLC is disregarded, and the value of the real property owned by the LLC is included in the non-resident decedent’s gross estate. This may be an unwelcome surprise, especially as the default is to tax a single member Rhode Island LLC as a sole proprietorship- so a non-resident one must affirmatively elect to be taxed otherwise to avoid estate taxes being imposed on the property.
In 2021, where a non-resident’s gross estate exceeds $1,595,156.00 and includes real estate (including real estate owned by the decedent’s single-member LLC) or tangible personal property located in Rhode Island, the decedent’s estate will be required to file an estate tax return and pay any related tax imposed. The Rhode Island Estate Tax is calculated based on the total gross estate and is not based solely on the Rhode Island property.
In order to avoid this result, the non-resident owner of a single member LLC holding real estate in Rhode Island may wish to consider adding additional members (even a small dilution will remove the “single member” stigma). The question of who, and in what proportion, to add members and divest of single member status is an important estate and business planning consideration, and the decision needs to be made in light of one’s existing estate plan, desired changes, and current operating documents. For more information, please contact your PLDO estate and tax planning attorney or Senior Counsel Leah A. Foertsch in our Boca Raton, Florida office at 561-362-2030 or by email at [email protected] and PLDO Partner Gene M. Carlino in Rhode Island at 401-824-5100 or in Florida at 561-362-2030 or email [email protected].
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